When you decide to sell some or all of your future structured settlement payments, here’s what you can expect:

1. Negotiating the terms: Like any other business transaction, a sale of structured settlement payments will have some elements that are negotiable. The most important part of a structured settlement factoring transaction, assuming you have found a reputable and capable company to work with, is the price. The price, or amount the seller will receive from the sale, is going to depend on the amount of future payments that are being sold and the discount rate that is applied. The discount rate is the number used to calculate the present value of the future payments – sort of like using an annual percentage rate in reverse. The lower the rate, the more money the seller will receive.  (NB:  The term "discount rate" can be confusing, because of several other numbers and measures that can be used.  See this article for more information.)

2. Disclosures: Once the terms of the sale are agreed, the buyer (factoring company) will send the seller written disclosures outlining the terms. Most state transfer laws require these to be sent out several days before the purchase contract is signed.

3. Contract: The contract and other legal documents will be sent to the seller for review and execution. These should be carefully read and considered. Usually, and depending on the law of the state where the seller lives, the seller will also receive at this time a notice that they should seek professional advice, or waive that right in writing. If the seller chooses to get professional advice, it would be a good idea to have the advisor review the contract before signing.

**Caution: Look in the contract for any references to “rights of first refusal” as these may impact your rights to sell more payments in the future. Be sure you understand what these terms mean.

4. Underwriting: This process actually starts before the contract is signed and can last throughout the sale process. Underwriting is the process of verification of essential information and gathering key documents necessary to process the sale. Because of the unique regulation of structured settlement factoring transactions, it also involves preparing for the court approval process (to be explained more below). Usually, the factoring company underwriters will want to see the underlying personal injury settlement agreement, the annuity, and any court orders relating to the settlement or payments. Most factoring companies will also request a detailed explanation of what the sale proceeds will be used for and, if possible, documentation of that need. For instance, if the seller needs the funds to pay off high-interest debts, then statements showing that debt should be provided.

5. Court Approval: Federal law enacted in 2002 requires that all structured settlement factoring transactions must be approved by a court, usually in the state and county where the seller lives. While some states differ, in general there will be a hearing where the judge will be presented with the basic facts of the proposed transaction (how much money will be received, what payments are being sold, etc.). Another key component of the hearing will be evidence of why the payments should be sold – in other words, how the sale is “in the best interests of the seller, taking into account the welfare and support of any dependents.” The statutorily mandated finding of “best interest,” although not further defined, is the linchpin of the approval hearing. To satisfactorily find that the transfer meets the best interest standard, the court may inquire into the proposed uses of the sale proceeds, how the seller will meet ordinary needs without the payments to be sold, the general financial and family situation of the seller, and the discount rate applied to the transaction. Sometimes the seller will have independent counsel at the transfer hearing, but that is usually not required (even if the seller obtained independent advice on the sale). Occasionally, and for a variety of reasons, the insurance company that owns the annuity or issues the structured settlement payments may appear at the hearing and object to the transfer. However, usually the factoring company’s attorney will be the only attorney present and will present the transfer to the judge for consideration. In most cases the seller will also attend to answer any questions the judge or factoring company attorney will ask.

As Kirk Hughes has written about in the past, this entire process usually takes between 60 and 90 days.

If you would like any more information on the factoring process please do not hesitate to contact me at mbracy@setcap.com, or Kirk Hughes at khughes@setcap.com, or call us at 800-959-0006.